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ETE: Poised for Growth

12/02/2015 9:51 am EST

Focus: MLPS

Michael Berger

President & Founder,

Looking ahead, while commodity price volatility should continue to act as a headwind, Michael Berger, of, still recommends incorporating well positioned MLPs—such as this one—into any diversified portfolio.

Many hedge funds are betting against the price of oil prior to the Organization of Petroleum Exporting Countries’ (OPEC) meeting in Vienna on December 4. During the week that ended on November 24, money managers’ net-long position in West Texas Intermediate (WTI) crude oil fell by 20%, the largest drop since July.

The price of WTI has fallen by more than 25% since July 1 and many analysts expect to see oil trade down to the mid-to-low $30s if OPEC does not cut production. We do not expect to see OPEC cut production and this will serve as a headwind for United States shale producers during 2016.

Big Change in One Year

One year ago, Saudi Arabia led OPEC in keeping production quotas steady, which made the global oversupply situation even worse and sent the price of WTI from the high $60s to the mid $40s. We expect to see a repeat of this when Iran announces plans to increase oil production due to the lifting of economic sanctions.

During November, OPEC produced more than 32 million barrels a day, the eighteenth straight month above 30 million. Currently, the United States has more than 488 million barrels of oil stockpiled, the highest amount for this time of year since 1930.

OPEC has been able to successfully defend its market share against the United States. During the first nine months of 2015, domestic shale drillers cut spending by $40 billion and the number of idled oil rigs increased. During 2015, United States oil production has remained flat after three consecutive years of adding one million barrels a day.

MLPs Significantly Underperform the Broader Market

The master limited partnership (MLP) sector has seen heavy weakness due to the weak oil price environment. The Alerian MLP Index (AMZ) is comprised of a diversified group of 50 MLPs and is often used to measure the strength of the industry. During 2015, the index has substantially underperformed the broader equity market, declining 35.6% relative to a 2.1% gain in the S&P 500 (SPX).

Investors should target companies that have the following characteristics: 1) Geographic diversity, 2) Stable and visible cash flow (the more fee-based, the better), 3) Visible growth backlog, 4) Ample liquidity to capitalize on organic and inorganic growth initiatives, and 5) Experienced management team.

ETE Poised for Growth During 2016

Looking ahead, while commodity price volatility should continue to act as a headwind, we continue to recommend incorporating well positioned MLPs into any well diversified portfolio.

One company we have become increasingly favorable on is Energy Transfer Equity LP (ETE). The company offers investors an attractive total return due to its exposure to underlying cash flow growth from: 1) Energy Transfer Partners (ETP), 2) Williams Partners (WMB), 3) Sunoco Logistics (SXL), 4) Sunoco LP (SUN), and 5) Lake Charles LNG project.

During the last three months, ETE has fallen more than 29% and shares are trading below its 20-, 50-, and 150-day moving average. Although shares have fallen significantly during the last three months, ETE is up more than 33% during 2015. At current levels, we believe the risk/reward profile is very favorable due to its substantial general partner leverage paired with our increased confidence in above-average, long-term cash flow growth at its limited partners (ETP, WMB, SXL, SUN, and Lake Charles).

Partnerships on Our Radar

We also believe that the following stocks possess the right characteristics and will outperform the market on a longer-term basis: Antero Midstream Partners LP (AM), Enterprise Products Partners LP (EPD), Rose Rock Midstream (RRMS), Magellan Midstream Partners (MMP), Plains GP Holdings (PAGP), Tesoro Logistics (TLLP), Targa Resources Corp. (TRGP), and Vanguard Natural Resources (VNR).

Michael Berger, Founder and President,

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